Rescaling-contraction with a lower cost technology when revenue declinesCitation formats

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Rescaling-contraction with a lower cost technology when revenue declines. / Adkins, Roger; Paxson, Dean.

In: European Journal of Operational Research, 2019.

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Adkins, Roger ; Paxson, Dean. / Rescaling-contraction with a lower cost technology when revenue declines. In: European Journal of Operational Research. 2019.

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@article{a3c166a6b11c41cd80b30b9b947da6c6,
title = "Rescaling-contraction with a lower cost technology when revenue declines",
abstract = "A mature oil field rescaled contraction describes a switch to a technological alternative more appropriate for the depleted state of an underlying resource. Off-shore oil rigs are an illustration, since the original technological scale designed for very large output flows becomes inappropriate as the operational efficiency declines later in life and facing a dwindling output flow, so a more appropriate extraction technology becomes economic. A real option representation is formulated on a stochastic oil price and deteriorating output volume. We consider investment/divestment decisions both separately, and jointly, which have different implications for government policies and also option values. The resulting model yields analytical (or semi-analytical) results indicating that immediate switching to the lower cost technology could sometimes be hastened as the price volatility increases, depending on the current revenue, if divestment and switching are considered jointly. However, greater volatility could also promote hysteresis.",
keywords = "OR in natural resources, Technology switching options, Rescaling-contraction, Investment under uncertainty",
author = "Roger Adkins and Dean Paxson",
year = "2019",
doi = "10.1016/j.ejor.2019.02.037",
language = "English",
journal = "European Journal of Operational Research",
issn = "0377-2217",
publisher = "Elsevier BV",

}

RIS

TY - JOUR

T1 - Rescaling-contraction with a lower cost technology when revenue declines

AU - Adkins, Roger

AU - Paxson, Dean

PY - 2019

Y1 - 2019

N2 - A mature oil field rescaled contraction describes a switch to a technological alternative more appropriate for the depleted state of an underlying resource. Off-shore oil rigs are an illustration, since the original technological scale designed for very large output flows becomes inappropriate as the operational efficiency declines later in life and facing a dwindling output flow, so a more appropriate extraction technology becomes economic. A real option representation is formulated on a stochastic oil price and deteriorating output volume. We consider investment/divestment decisions both separately, and jointly, which have different implications for government policies and also option values. The resulting model yields analytical (or semi-analytical) results indicating that immediate switching to the lower cost technology could sometimes be hastened as the price volatility increases, depending on the current revenue, if divestment and switching are considered jointly. However, greater volatility could also promote hysteresis.

AB - A mature oil field rescaled contraction describes a switch to a technological alternative more appropriate for the depleted state of an underlying resource. Off-shore oil rigs are an illustration, since the original technological scale designed for very large output flows becomes inappropriate as the operational efficiency declines later in life and facing a dwindling output flow, so a more appropriate extraction technology becomes economic. A real option representation is formulated on a stochastic oil price and deteriorating output volume. We consider investment/divestment decisions both separately, and jointly, which have different implications for government policies and also option values. The resulting model yields analytical (or semi-analytical) results indicating that immediate switching to the lower cost technology could sometimes be hastened as the price volatility increases, depending on the current revenue, if divestment and switching are considered jointly. However, greater volatility could also promote hysteresis.

KW - OR in natural resources

KW - Technology switching options

KW - Rescaling-contraction

KW - Investment under uncertainty

U2 - 10.1016/j.ejor.2019.02.037

DO - 10.1016/j.ejor.2019.02.037

M3 - Article

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

ER -